ESMA criticizes Poland over proposal for lower margin requirements for experienced CFD traders

Maria Nikolova

ESMA does not consider that lowering margin requirements for experienced clients is appropriate.

MiFID II implementation likely to be set back even further

The European Securities and Markets Authority (ESMA) has just published another set of opinions regarding the national measures aimed at restricting the offering of CFDs to retail clients of brokerages. The opinion regarding the Polish measures is particularly interesting.

The Komisja Nadzoru Finansowego of Poland (KNF) notified ESMA on June 28, 2019 of its intention to take product intervention measures.

The KNF informed ESMA that the national measures are the same as ESMA’s measures at national level, except that the national measures: (i) in the case of services provided from Poland in another Member State, would only apply in the absence of a related product intervention measure applicable to those services in the host Member State (reduced territorial scope); and (ii) in the case of services provided in Poland, would enable a new category of experienced clients to have lower initial margin requirements for two of the five types of underlying in ESMA’s measures (lower margin requirements for experienced clients). The national measures are expected to take effect on August 1, 2019.

In respect of the lower margin requirements, the KNF observed (i) a decrease in the number of active accounts of retail clients; (ii) a significant decrease in the trading volume by retail clients; and (iii) a decrease in the number of transactions carried out by retail clients. Surveys conducted by the KNF and by a Polish association of investment firms indicate that many Polish clients opened an account with a broker registered outside of the Union and that this was driven by the ability to access higher leverage. The KNF has concerns that such investors are not protected by the requirements of Regulation (EU) 600/2014 or Directive 2014/65/EU of the European Parliament and of the Council (8) and have to operate in a foreign legal system, which may not provide equivalent protection.

The KNF proposes to subdivide the definition of a retail client by including a new category of ‘experienced client’ in its national measures. For experienced clients only, the national measures provide a lower initial margin requirement for the first two types of underlying referred to in points (a) and (b) of Annex 1 of ESMA’s measures, which are (i) main currency pairs; and (ii) other currency pairs, main equity indices and gold. In particular, instead of the initial margin percentages of 3,33% and 5% used in ESMA’s measures for these two types of underlying, the national measures propose an initial margin requirement of 1%.

In response, ESMA states that it does not consider that lowering margin requirements for experienced clients is appropriate. Excessive leverage was one of the major causes for consumer detriment that led to ESMA’s measures.

Furthermore, ESMA notes that Directive 2014/65/EU differentiates between retail clients and professional clients and lays down criteria that must be met for a retail client to become a professional client on request. When taking its measures, ESMA concluded that ESMA’s measures should apply in respect of all retail clients.

As confirmed by the KNF in its own analysis, there is no evidence that a specific subset of retail clients lose less money or lose less frequently when trading CFDs. Moreover, the KNF has not provided any evidence that a specific subset of retail clients differ systematically in their investment needs or risk tolerance. As such, ESMA has neither received evidence to support lower margin requirements for experienced clients in general nor for a specific sub-set of retail clients.

ESMA concludes that the national measures are justified and proportionate except for:

  • the reduced territorial scope; and
  • the lower margin requirements for experienced clients.

ESMA, however, does not make it clear whether it will take any particular action with regard to Poland given the specific Polish approach to CFD restrictions. It could be that the public scolding exhausts ESMA’s powers when it comes to intervening in the national policies. This has earlier been indicated in an ESMA newsletter.

Let’s also note that the Cypriot regulator has outlined proposals for CFD restrictions similar to those outlined by Poland’s KNF. According to CySEC, there have to be various sub-categories of retail traders and leverage has to vary across these sub-categories.

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